Chapter Outline What is Financial Planning? Financial Planning Models:A First Look The Percentage of Sales Approach External Financing and Growth Some Caveats Regarding Financial Planning Models 15
15 Chapter Outline n What is Financial Planning? n Financial Planning Models: A First Look n The Percentage of Sales Approach n External Financing and Growth n Some Caveats Regarding Financial Planning Models
Percent of Sales Approach Separate items in Income Statement and Balance Sheet into 2 groups: Some items tend to vary directly with sales,while others do not Income Statement 0 Costs may vary directly with sales If this is the case,then the profit margin is constant Dividends are a management decision and generally do not vary directly with sales-this affects the retained earnings that go on the balance sheet 16
16 Percent of Sales Approach n Separate items in Income Statement and Balance Sheet into 2 groups: q Some items tend to vary directly with sales, while others do not n Income Statement q Costs may vary directly with sales n If this is the case, then the profit margin is constant q Dividends are a management decision and generally do not vary directly with sales – this affects the retained earnings that go on the balance sheet
Growth and External Financing Another Example Projected Increase in Addition to External Projected Sales Assets Retained Financing Debt-Equity Growth Required Earning Needed Ratio 0% $0 $44.0 -$44.0 7 5 25 46.2 -21.2 .77 10 50 48.4 1.6 .84 15 75 50.6 24.4 91 20 100 52.8 47.2 .98 25 125 55.0 70.0 1.05 17
17 Growth and External Financing Another Example Projected Sales Growth Increase in Assets Required Addition to Retained Earning External Financing Needed Projected Debt-Equity Ratio 0% $ 0 $ 44.0 -$ 44.0 .7 5 25 46.2 -21.2 .77 10 50 48.4 1.6 .84 15 75 50.6 24.4 .91 20 100 52.8 47.2 .98 25 125 55.0 70.0 1.05
Growth and External Financing At low growth levels,internal financing (retained earnings) may exceed the required investment in assets As the growth rate increases,the internal financing will not be enough and the firm will have to go to the capital markets for money Examining the relationship between growth and external financing required is a useful tool in long-range planning 18
18 Growth and External Financing n At low growth levels, internal financing (retained earnings) may exceed the required investment in assets n As the growth rate increases, the internal financing will not be enough and the firm will have to go to the capital markets for money n Examining the relationship between growth and external financing required is a useful tool in long-range planning
The Internal Growth Rate The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing. ROA×b Internal Growth Rate 1-ROA×b .132×(2/3) =.0965 1-.132×(2/3) =9.65% 19
19 The Internal Growth Rate n The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing. 9.65% .0965 1 .132 (2 / 3) .132 (2 / 3) 1- ROA b ROA b InternalGrowth Rate